Australian Insolvency Group Pty Ltd v LCM Litigation Investment Fund No 1 Pty Ltd

The motions before the Court

1. The Court has three motions before it. They are: LCM's application for orders for separate determination of two questions, to strike out a number of paragraphs of AIG's List Statement and to dismiss the prayers for interlocutory relief in paragraphs 3, 4 and 5 of the Summons. LCM's application to set aside two Notices to Produce. The first is addressed to LCM and requires the production of documents relating to funds held by LCM under the Deed of Bare Trust. The second is addressed to LCM Trustee and requires the production of documents relating to funds held by it under the LCM Unit Trust. AIG's application for leave to amend its List Statement, for an order that these and the Vannin proceedings be consolidated or heard together, and for orders that LCM pay or transfer to LCM Trustee any fees received and held by LCM on trust pursuant to the Deed of Bare Trust and that LCM Trustee pay into Court all amounts held or received by it as trustee of the LCM Unit Trust.
2. At the commencement of argument, AIG was given leave to amend its List Statement in the respects sought by its motion. Those amendments make more specific allegations as to LCM's express and implied obligations as trustee pursuant to the Deed of Bare Trust. They also make an allegation as to LCM's fiduciary duty in that capacity not to prefer its interests to those of the beneficiary of that trust, LCM Trustee. It is said that LCM breached those duties and that by failing to take any steps to protect the interests of the LCM Unit Trust with respect to those alleged breaches, LCM Trustee breached its own duties, including by preferring the interests of its shareholder LCM, or by failing to avoid a conflict between those interests and its duty to act in the interests of its unit holders.
3. It is convenient, and the parties agree, that I should first address LCM's application for the determination of separate questions and related relief, and then address AIG's application for the consolidation of these and the Vannin proceedings and related relief. In the course of the hearing of AIG's application, LCM and LCM Trustee produced some documents in answer to the Notices to Produce. That makes it unnecessary, except in one respect, to address LCM's second application.

LCM's first application (including for the determination of separate questions)

1. As amended in the course of argument, the questions which LCM proposes should be determined separately are: 1. Whether, whilst the Second Defendant (LCM) is the trustee of the Bare Trust, LCM has an obligation: (a) to exercise its rights in connection with the offer of litigation funding projects to Vannin Capital Limited (Vannin) for the purposes of the Administration Agreement dated 24 April 2013 (Administration Agreement); in the interests of the beneficiaries of the LCM Unit Trust. 2. Whether LCM is obliged: (a) to exercise its rights in connection with the offer of litigation funding projects to Vannin for the purposes of the Administration Agreement; or (b) to exercise its rights in connection with the defence or settlement of the Vannin Litigation, in accordance with directions given by the First Defendant as trustee of the LCM Unit Trust under clause 1(b)(ii) of the Bare Trust Deed dated 14 February 2014.
2. AIG opposes the separate determination of these questions. It does so for the following reasons. First, it says that the questions as formulated do not address the allegations made as to LCM's obligations and duties as trustee. Secondly, it says that even if those questions arise and are resolved in LCM's favour, a substantial part of the proceedings would remain to be determined. That second proposition does not appear to be contested, at least to the extent of the allegations made against LCM Trustee as to breaches in the administration of the LCM Unit Trust. LCM also accepts that it would remain a party to the proceedings even if the separate questions are addressed and answered in its favour.
3. The parties are not agreed as to the nature of the allegations made by AIG. That may be due in part to the amendments made to the List Statement at the commencement of the hearing. In its written submissions LCM summarised the allegations made by AIG's unamended List Statement ("CLS") as follows: 6. In the present proceedings AIG alleges that LCM Trustee has breached its duties as trustee of the Unit Trust, and seeks an order for its removal as trustee. AIG alleges among other things that: (a) there is another LCM project which LCM should have offered to Vannin under the Administration Agreement, but did not (CLS [81]); (b) there was, and is, a conflict between LCM's interest in not conceding profitable projects to Vannin under the Administration Agreement and in successfully defending the Vannin proceedings, on the one hand, and LCM Trustee's duties as trustee of the Unit Trust, or LCM's duties as trustee of the Bare Trust, on the other hand (CLS [95], [97]); and (c) LCM Trustee has breached its duty as trustee of the Unit Trust by failing to take proper steps to protect the alleged interests of the Unit Trust in the LCM project in question and the defence or settlement of the Vannin proceedings (CLS [88]-[89], [93]-[94], [96], [99]-[100], [104]-[107]).
4. In response, and by reference to the paragraphs in its amended List Statement, AIG summarises those allegations as follows: 7. The allegations in the Amended Commercial List Statement (ACLS) (while the motion refers to a Commercial List Statement, given AIG now seeks to rely on an ACLS which inserts and amends paragraphs from 97A to 98A, for the purposes of these submissions the pleading is described as the ACLS) which LCM now seeks to strike out pursuant to Order 2 of its motion are, in summary, as follows: (1) an outline of the 3 projects the subject of the Vannin proceedings (the Vannin Allegations) (paragraphs 38 to 43), and the new allegation in which AIG alleges that [a further funding opportunity] should also have been offered to Vannin (paragraphs 46-53); (2) that the LCM Trustee has failed to take any steps, or any proper steps, as an independent trustee would, to protect the interests of the Unit Trust and its unitholders in respect of the [further allegation] and the Vannin Allegations (see paragraphs 81 to 94, and in particular 88 to 89 and 93 to 94, of the ACLS); (3) that the LCM Trustee's conduct was in breach of its duties and obligations as trustee of the Unit Trust by preferring, or failing to avoid a conflict between, its own interests and the interests of LCM, and its duty to act in the interests of the unitholders by taking steps to protect the interests of the Unit Trust (see paragraphs 95 to 96 of the ACLS); (4) that LCM has failed to comply with express and implied obligations in the Bare Trust Deed including obligations to do all things necessary to give effect to the Bare Trust Deed, and had breached a fiduciary duty to the LCM Trustee to not prefer and to avoid a conflict between its own interests in not offering projects to Vannin, and LCM Trustee's interest in ensuring that projects be properly offered to Vannin (the allegations as against LCM are set out at paragraph 97 of the ACLS, and in more detail at paragraphs 97A to 98A of the ACLS which AIG now seeks leave to file); (5) that LCM Trustee has knowledge of LCM's conflict of interest and has failed to take any steps, or any proper steps, to protect the interest of the Unit Trust (paragraphs 98 to 100); (6) that LCM Trustee has breached duties and obligations by failing to take any steps or proper steps to ensure the interest of the unitholders were protected in relation to any settlement or settlement negotiations between LCM and Vannin, and by preferring or failing to avoid a conflict (see paragraphs 101 to 107).
5. I agree, as AIG submits, that proposed question 1 does not sufficiently record the issues raised by AIG's pleadings as to LCM's express and implied obligations as trustee under the Deed of Bare Trust and its fiduciary duty in that regard. Those obligations and that duty are pleaded in paragraphs 97A, 97B and 97D of the amended List Statement. AIG's case is that each of those obligations was breached if LCM did not comply with its obligation under cl 6.1 of the Administration Agreement (paragraph 97C) and that LCM breached its fiduciary duty (paragraph 98A) by having a conflict of interest and duty (paragraph 97). These claims form the basis for the allegation that LCM Trustee, in breach of its own duties, has not in the face of its knowledge of LCM's conflicted position taken any steps to protect the interests of the LCM Unit Trust (paragraphs 99 and 100).
6. AIG submits that proposed question 2 does not arise at all because "no allegation is made that LCM has an obligation to exercise rights in connection with offering projects to Vannin and defending the Vannin Proceedings in accordance with directions given by LCM Trustee". I agree. AIG also points out that the allegations made as to LCM Trustee's failures do not include that it should have given directions in relation to the offering of projects to Vannin or to the defence or settlement of the Vannin proceedings. I also agree.
7. That being the position, no order should be made for the separate determination of the questions proposed. They do not address the issues raised by AIG's pleadings with respect to LCM's obligations and duties. The present case is one where, in my view, the allegations as to the existence and breach of duties should be tried with all of the other issues because of the complex questions they raise and the likelihood that their resolution will be assisted by evidence directed to the factual context in which they arise.
8. LCM's alternative application to strike out paragraphs of the List Statement also should be rejected. The basis on which that application is made is that the allegations in paragraphs 38 to 43, 46 to 53 and 81 to 107 disclose no reasonable cause of action: Uniform Civil Procedure Rules 2005 (NSW), r 14.28(1)(a).
9. Paragraphs 97A to 98A of the amended List Statement contain allegations as to obligations and duties of LCM as trustee under the Deed of Bare Trust. Those allegations raise difficult questions of law. They provide the basis for the allegations against LCM Trustee in paragraphs 99 and 100. The remaining paragraphs sought to be struck out contain allegations of breaches of duty by LCM Trustee with respect to the taking of steps to protect the interests of the LCM Unit Trust in light of its knowledge of the Vannin allegations and further allegation. They allege different breaches from those contained in paragraphs 99 and 100. They raise equally difficult questions of fact and law.
10. In the course of argument, Mr TGR Parker SC, who appears for LCM and LCM Trustee, urged that even if the Court did not make orders for separate determination of the questions proposed, it should grant the strike out application at least in respect of any allegation that LCM was required to exercise its rights in connection with the offer of litigation funding projects and in connection with the defence or settlement of the Vannin proceedings in accordance with directions given to it by LCM Trustee. As no such allegations are made by AIG's amended List Statement, it is not necessary to address this application any further.
11. There remains for consideration the application to dismiss the claims to interlocutory relief made by paragraphs 3 to 5 of AIG's Summons. The orders sought by paragraphs 4 and 5 are in similar terms to the relief sought by AIG in proposed order 3 of its notice of motion. The order sought by paragraph 3 of the Summons is for the production of documents by LCM which identify the assets held by it as trustee under the Deed of Bare Trust as at 1 March 2016. As appears below, documents answering that description were sought by the Notices to Produce to which there has now been a response. Accordingly, I will deal with LCM's application in respect of the interlocutory relief at the conclusion of these reasons.

LCM's second application (to set aside the two Notices to Produce)

1. It would seem that the initial objection to the issue of these notices was that they were not directed to any particular issue then before the Court and were, as Mr Parker SC put it, "really seeking to attain by way of notice to produce something that should have been obtained either by way of final relief or through the proper interlocutory procedures". Subsequently, AIG filed its notice of motion seeking orders that LCM pay all unpaid performance fees to LCM Trustee and that LCM Trustee pay into Court all amounts held by it as trustee of the LCM Unit Trust (orders 5 and 6 sought in that motion). In argument on that application, LCM and LCM Trustee produced three documents in answer to the Notices to Produce, thereby abandoning their motion to set those notices aside. As the motion is no longer pressed, it should be dismissed. Mr Parker SC asks the Court to reserve any question of costs in view of the changed circumstances which resulted in the withdrawal of the motion. I propose to make no order as to the costs of this motion and to give the parties liberty to apply to vary that order. I think it unlikely that the costs of this motion are sufficiently significant to justify any further argument about those costs.

AIG's application for various orders

1. Order 1 as sought is for leave to file the amended List Statement. That application was not opposed on the basis that AIG pay the defendants' costs thrown away by the amendments.
2. Order 4 is that these proceedings be consolidated with, or heard together with or following the Vannin proceedings. AIG does not seek this order immediately because it accepts that Vannin should be given the opportunity to be heard on the application. For that reason, AIG seeks orders 2 and 3, which would allow for the provision to Vannin of copies of the pleadings in these proceedings. That has not occurred to date because of the allegation made in these proceedings relating to the further funding opportunity and the obligations of confidence owed, at least by Mr Coope, with respect to the existence and terms of that opportunity.
3. Order 2 seeks a variation of the undertaking given by Mr Coope in the proceedings relating to the termination of his employment by LCM: [2015] NSWSC 992. That undertaking relates to the disclosure of Confidential Information and Intellectual Property, as defined in Mr Coope's employment contract. The purpose of the variation is to make clear that the relevant undertaking would not be breached by Mr Coope or AIG providing to Vannin the pleadings in these proceedings. Order 3 is for a direction that AIG serve copies of those pleadings on Vannin for the purpose of enabling it to consider whether it might consent to the consolidation of the proceedings.
4. If a direction is made in terms of order 3 it would not be necessary that a separate order be made amending the terms of Mr Coope's undertaking. I would not, in any event, make an order varying an undertaking given in other proceedings without an understanding of the context in which it was given and without being satisfied that all of the relevant parties having the benefit of that undertaking have been heard.
5. AIG accepts that order 3 is sought only in aid of its application for consolidation. It follows that, if the Court is not disposed to make an order for consolidation, there would be no reason to make a direction in terms of order 3.
6. AIG argues that these and the Vannin proceedings should be consolidated or heard together because they give rise to common questions (see UCPR, r 28.5(a)). Those questions are said to be whether LCM breached cl 6.1 of the Administration Agreement in relation to the three funding projects which are the subject of the Vannin proceedings and whether LCM was in breach of the same provision with respect to the further funding opportunity referred to in these proceedings. No submission was addressed to whether any particular questions arise in either proceedings as to the construction of cl 6.1 or its operation.
7. The question whether there was a breach of cl 6.1 in relation to the three funding projects identified in the Vannin proceedings is not an issue raised in the present proceedings. Here the issue is whether having knowledge of the allegations made in the Vannin proceedings, LCM Trustee was in breach of its duty by failing to take steps to protect the interests of the LCM Unit Trust: amended List Statement, paragraphs 90, 91, 93, 94, 96, 98, 99 and 100. In oral argument it was suggested that the question said to be common between the proceedings is raised by paragraph 97C of the amended List Statement. I do not read the pleading in that way. That paragraph commences with the conditional words "insofar as" and does not itself make any allegation of breach. Furthermore the pleaded breaches by LCM Trustee of its duties (paragraphs 98-100) expressly depend on its knowledge of the allegations, rather than of the truth of those allegations.
8. Thus, on the pleadings, there is no common question concerning a breach of cl 6.1 and no apparent issue as to the construction of that provision or its operation arises in the present proceedings where the relevant fact is knowledge of allegations as distinct from actual breach. That being the position, the primary basis on which it is said the power to order consolidation arises is not made out.
9. It was also argued that it is desirable for such an order to be made (UCPR, r 28.5(c)) to avoid the possibility that the question whether there has been a breach of cl 6.1 with respect to the further funding opportunity has to be decided a second time if Vannin subsequently makes that or a similar allegation. This argument proceeds on the premise that that question of breach is raised in these proceedings. In my view it is not. In relation to that opportunity, the relevant pleaded facts are the making of the allegation and LCM Trustee's knowledge of it: amended List Statement, paragraphs 81, 82, 83, 89, 96, 98, 99 and 100.
10. For these reasons I am not satisfied that an order should be made consolidating the proceedings. It follows that no direction should be made in accordance with proposed order 3.
11. Order 5 as sought is that LCM pay to LCM Trustee any unpaid performance fees in respect of two funding projects referred to Vannin and described as the Alliance Project and the Mouldcam Project. The total amount of those fees is said to have been $363,195. Order 6 is that LCM Trustee pay into Court all amounts held or received by it as trustee of the LCM Unit Trust.
12. The evidence on the application for these orders included affidavit and oral evidence given by Mr Coope; the tender of accounting and banking records of LCM and LCM Trustee; and email exchanges between the parties. Many of these documents are referred to in paragraphs 30 to 37 of the amended List Statement. That evidence permits the following findings to be made as to the likely position with respect to the making and receipt of payments as between Vannin, LCM and LCM Trustee.
13. Prior to 30 June 2015, LCM Trustee was paid $203,195.50 by LCM as performance fees in respect of the Alliance Project. After 30 June 2015 and before 1 April 2016, the LCM Unit Trust was paid a further amount of $160,000 in respect of performance fees for the Mouldcam Project. The latter fact is asserted by Mr Coope in an email to Mr Moloney dated 31 March 2016. In response, Mr Moloney says that the LCM Unit Trust "currently holds cash assets of $357,303" representing the entitlements from the Alliance and Mouldcam Projects as held in an account "which is unencumbered and controlled by the trustee". That account would appear to be the bank account styled "Vannin Investment Account".
14. On the basis of that evidence I am not satisfied that there are any performance fees due in respect of the Alliance or Mouldcam Projects which have not been paid by Vannin to LCM and by LCM to LCM Trustee. (Because those funds appear to be held in a bank account of LCM, it may be that they are to be treated, as LCM Trustee's accounts suggest, as having been loaned by LCM Trustee back to LCM.) However the fact that the fees have been paid is good reason to reject the application for an interlocutory order in terms of proposed order 5.
15. Order 6 is in the nature of final relief as it seeks to have LCM Trustee pay into Court all of the monies held by it as trustee. Whilst the evidence does indicate that the Trust's funds may not be held separately from the assets of LCM, Mr Moloney asserts, in his email dated 1 April 2016, that the purpose for which the account in which those funds are held was set up included the holding of such funds in accordance with the system established by Mr Coope when he "controlled the Trustee". This assertion is at least partly contested as Mr Coope does not accept that any trust monies of LCM Trustee were paid into that account whilst he was a Joint Managing Director of LCM. I am not in a position to resolve that dispute on this application.
16. Order 6 is sought on the basis that there is a serious question to be tried as to whether LCM Trustee should be removed as trustee of the LCM Unit Trust. The grounds relied on for the granting of that final relief include that there have been (with respect to the administration of the Trust) breaches of cll 2.3 (keeping assets separate), 12.4(b) (distribution of unit holders' share of Distributable Income), 21.1 (timely preparation of financial reports for the financial years ended 30 June 2014 and 30 June 2015) and 21.2 (provision of information to unit holders) of the LCM Unit Trust Deed. It is said that the order should be made at this stage of the proceedings to protect the assets of the unit trust pending their determination.
17. Whilst the evidence suggests that there may have been breaches of some of these provisions, it is not obvious, in circumstances where the application for removal is made by a minority unit holder, that those breaches alone would be sufficient to justify the removal of the trustee. Nor am I satisfied that it is necessary to make such an order at this time to protect the assets of the Trust or AIG's interests as unit holder. Those assets consist only of funds received from LCM and a debt of $100,000 owed by LCM. The audited special purpose financial report of the LCM Unit Trust for the period ended 30 June 2015 confirms that at that date the Trust's total assets were $303,267. Part of that amount, $203,266, is described in a note to those accounts as "Performance Rights Receivable", indicating that the amount is not held in a bank account of LCM Trustee. That is consistent with those funds being held in the Vannin Investment Account as Mr Moloney asserts.
18. Mr Moloney also says in the email of 1 April 2016 that since 30 June 2015 the Mouldcam performance fees have been received and paid into that account. As a result he says that the trust funds held in the account "controlled by the trustee" total $357,303. The discrepancy between the amount paid in respect of the two funding projects ($363,195) and the amount held in that account ($357,303) is not significant.
19. The evidence suggests that to date, the Trust has been administered fairly informally and without strict regard to the express terms of the trust deed. Under those arrangements funds of LCM Trustee may have been and continue to be held in the Vannin Investment Account. The evidence is that as at 31 March 2016 the credit balance of that account was $480,802.51. I also note in relation to the deposit of monies into that account, that under cl 15.2 of the trust deed, LCM Trustee has power to invest funds of the Trust by way of deposit or loan, with or without security. That being the position, I am not satisfied that it is necessary to prevent the risk of dissipation of the assets of the Trust or to protect the position of AIG as unit holder by making the order sought.
20. Finally, I address LCM's application in respect of the interlocutory relief sought in paragraphs 3, 4 and 5 of the Summons. As I have already noted the relief sought by paragraphs 4 and 5 is in substance the same as that sought by paragraph 3 of AIG's motion. For the same reasons as I have dismissed the application for that direction, I propose to dismiss the relief sought in paragraphs 4 and 5 of the Summons. The order sought by paragraph 3 of the Summons is for the production of substantially the same documents as are called for by the Notice to Produce directed to LCM. There has been a response to that notice and the pleading does not otherwise support the claim to an order for the production of documents by LCM to AIG, particularly in circumstances where the evidence suggests that all performance and other fees received by LCM have been paid to LCM Trustee. As such, and in the absence of there being any pleaded basis for the making of that order against LCM, I dismiss that claim for relief.

Conclusion

1. Accordingly I make the following orders:
2. Dismiss the second defendant's (LCM's) notice of motion filed 8 April 2016 for the determination of separate questions and to strike out paragraphs of the List Statement.
3. Order LCM pay the plaintiff's (AIG's) costs of the motion in order 1.
4. Dismiss LCM's notice of motion filed 8 April 2016 to set aside the two notices to produce.
5. Make no order as to the costs of the motion in order 3.
6. Grant liberty to either party to apply within seven days to vary order 4, any such application to be made by lodging written submissions (not to exceed two pages) with my Associate and by serving those submissions on the other party. Any response to those written submissions (not to exceed two pages) is to be lodged and served within seven days of receipt of the moving party's submissions. The question of costs will then be determined on the papers.
7. Confirm the order granting leave to AIG to file its Amended Commercial List Statement.
8. Order AIG pay the defendants' costs thrown away by the amendments resulting from order 6.
9. Otherwise dismiss AIG's notice of motion filed 11 April 2016 for consolidation, interlocutory orders as to the payment of monies and a direction as to the service of pleadings on Vannin Capital Limited.
10. Order AIG pay the first and second defendants' costs of the motion in order 8.
11. Dismiss the prayers for relief in paragraphs 3 to 5 of the Summons filed 23 March 2016.
12. Stand the proceedings over to the Commercial List on 22 April 2016 for further directions.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 21 April 2016